More than 40 percent of mothers with teenagers said there’s one piece of advice they’d go back and tell their new-parent selves, and that’s to start saving for college immediately, according to a nationwide NerdWallet survey.
But what about daycare, diapers and feeding the baby? And shouldn’t you plan for primary school first? We understand! There’s a lot on the sleep-deprived minds of new parents, but crunching the numbers of this seemingly far away expense could make you sit up and take notice.
From the increasing cost of tuition to the importance of a college degree to the reality of student loans, we’ll show you why it’s better to save for college sooner rather than later — plus recommend ways to build a college fund for your little one.
Tuition rates are on the rise
We often hear how fast health care costs are rising, but education costs are rising even faster. In 2016, the U.S. Bureau of Labor Statistics compared the United States’ total inflation to that of health care and education from 1994 to 2015. While total inflation increased by 2.3 percent year-over-year, health care rose by 3.7 percent and education grew by 5.2 percent.
To put this into perspective, tuition and fees during the 2000-2001 school year were $2,581 at the University of Central Florida (UCF) and $2,444 and the University of Florida (UF) for 30 credit hours. Fast-forward 17 years and you’ll find the tuition for the 2017-2018 school year is $6,368 at UCF and $6,380 at UF. That’s an increase of 147 and 161 percent respectively, over the life of a child from birth to high school graduation.
Degrees make a difference
Such a hefty price tag may make you wonder if college is worth the cost. While college isn’t for everyone (and not every profession requires it), those with four-year degrees have a substantial advantage both financially and competitively.
According to a 2014 Pew Research Center study, the median annual income of Millennials ages 25-32 with at least a Bachelor’s degree is $15,500 higher than those with Associate’s degrees and $17,500 higher than those with high school diplomas.
Job seekers with bachelor’s degrees also do better. According to a report (PDF) from the Georgetown University Center on Education & the Workforce, of the 11.6 million jobs created after the Great Recession, 8.4 million went to those with four-year degrees. While 3.1 million jobs went to those with two-year degrees and only 800,000 were obtained by those with high school diplomas.
Student loans can be hard to repay
In 2016, more than 44.2 million Americans had student loan debt totaling $1.44 trillion, per the New York Federal Reserve. Of those loans, 11.2 percent were delinquent. With an average monthly payment of these loans is $351, student loan debt sets many recent grads back when it comes to achieving milestones like buying a home, starting a family or moving out on their own. While getting a loan may be unavoidable for some, it’s best to rely on loans to supplement savings only when necessary.
Thinking about shouldering your child’s student loan so they don’t have to? You may want to table that idea. First, consider that the collateral on a student loan is your child’s future earning potential. Which will increase steadily while your earning potential levels off. Second, and more importantly, the years following your child’s graduation is the same time your own saving efforts for retirement should be at their peak. Having substantial student loan debts to pay could hinder those efforts — impacting the quality and timing of your retirement.
Saving sooner is simple
The sooner you start saving for tuition the lower your annual contribution will be, since your efforts will be stretched over a longer period of time. The good news is starting out is simple, and you can increase your contributions steadily over time.
Some saving tactics are better than others. You may be tempted to simply open a savings or money market account in your child’s name, but this could have a negative impact. That’s because any assets your kids own will weigh heavily on their financial aid scorecard, negatively impacting the aid they’ll receive. Not to mention, those accounts don’t carry tax benefits. Instead, you’ll want to consider one of these options:
- 529 College Savings Plan: These stock investment accounts allow you to make after-tax contributions that can grow tax free returns over the life of the plan. However, you can be penalized for withdrawing money from these accounts for reasons other than college, and they’re subject to the twists and turns of the marketplace.
- Prepaid College Plans: These plans allow you to save for tuition at a specific institution or group of institutions to avoid rising tuition costs, like the Florida Prepaid plan that covers tuition and fees for a state college or university.
- Coverdell Education Savings Accounts: Often called ESAs, these work similarly to the 529 plans but they can be used for any education costs along the way, including pre-school, secondary education, college or trade school.
At the end of the day, the best choice depends on your financial situation. It’s best to explore all your options — including those not listed above like trusts, CDs and savings bonds — with a financial advisor to determine a plan with the right flexibility and tax benefits needed to maximize your individual efforts.